2017 (8) TMI 1017 - AT - Insolvency and Bankruptcy

Appellants Qualify as Financial Creditors under Insolvency Law

The tribunal found that the appellants qualified as 'Financial Creditors' under the Insolvency & Bankruptcy Code as their arrangement with the ... Petition under Insolvency & Bankruptcy Code, 2016 - Whether the appellants who reached with agreements/Memorandum of Understandings with respondent for the purchase of three units being a residential flat, shop and office space in the projects developed, promoted and marketed by the respondent come within the meaning of 'Financial Creditor' as defined under the provisions of sub-section (5) of Section 7 of the I & B code - Whether an application for triggering insolvency process under Section 7 of I & B code' is maintainable where winding up petitions have been initiated and pending before Hon'ble High Court against the 'Corporate Debtor'? Held that:- The amount disbursed by the appellants was “against the consideration of the time value of the money” and “the Respondent-Corporate Debtor raised the amount by way of sale - purchase agreement, having a commercial effect of borrowing.” This is also clear from annual returns filed by Respondent and not disputed by the Respondent-Corporate Debtor in their annual returns, wherein the amount so raised/borrowed has been shown as 'commitment charges' under the head “Financial cost”. The financial cost includes “Interest of loans” and other charges. Therefore, the 'commitment charge', which include interest on loan, shown against the head “Financial cost” having accepted by the Corporate Debtor in their annual return, we hold that the appellants have successfully proved that they are 'financial Creditor' within the meaning of Section 5(7) of the I & B Code'. Learned Adjudicating Authority while rightly interpreted the provisions of law to understand the meaning of expression 'financial creditor' at paragraph 12 of the impugned judgment as quoted above, but failed to appreciate the nature of transactions in the present case and wrongly came to a conclusion “that it is a pure and simple agreement of sale and purchase of a piece of property and has not acquired the status of a financial debt as the transaction does not have consideration for the time value of money”. Thus we set aside the impugned judgment passed by the learned Adjudicating Authority and remit the matter to Adjudicating Authority to admit the application preferred by appellants and pass appropriate order, if the application under Section 7 of the 'I & B Code' is otherwise complete. In case it is found to be not complete, the appellants should be given seven days' time to complete the application as per proviso to Section 7 of the 'I & B Code'. Issues Involved:1. Whether the appellants qualify as 'Financial Creditors' under Section 5(7) of the Insolvency & Bankruptcy Code (I & B Code).2. Whether an application for triggering the insolvency process under Section 7 of the I & B Code is maintainable when winding-up petitions are pending before the High Court against the 'Corporate Debtor'.Detailed Analysis:1. Qualification as 'Financial Creditors':The appellants entered into agreements/Memoranda of Understanding (MOUs) with the respondent for the purchase of three units (a residential flat, shop, and office space) in projects developed by the respondent. Under these agreements, the appellants opted for a 'Committed Return Plan,' whereby they paid a substantial portion of the sale consideration upfront, and the respondent committed to paying them a fixed monthly amount as 'Committed Returns/Assured Returns' until the units were handed over.The appellants argued that this arrangement was a method for the respondent to mobilize funds at lower rates than available from financial institutions, making the appellants 'Financial Creditors' under Section 5(8)(f) of the I & B Code. They cited the SEBI order in the case of M/s. MVL Limited, which categorized similar transactions as 'Collective Investment Schemes.'The tribunal examined the definitions under Sections 5(7) and 5(8) of the I & B Code, noting that a 'financial debt' involves a debt disbursed against the consideration for the time value of money. The tribunal found that the appellants were 'investors' who had chosen the 'committed return plan,' and the respondent had agreed to pay monthly committed returns. This arrangement was considered a 'debt' under Section 3(11) of the I & B Code.The tribunal referred to the respondent's annual return, which showed the amounts owed to the appellants as 'commitment charges' under 'financial costs,' akin to interest on loans. Additionally, Form 16-A indicated TDS deductions on the committed returns, treated as 'interest other than interest on securities' under Section 194-A of the Income Tax Act.The tribunal concluded that the appellants' disbursements were against the consideration for the time value of money, qualifying as 'financial debt' under Section 5(8)(f). Therefore, the appellants met the criteria for being 'Financial Creditors' under Section 5(7).2. Maintainability of Application for Insolvency Process:The tribunal considered whether the application for triggering the insolvency process under Section 7 of the I & B Code was maintainable, given that winding-up petitions were pending before the High Court against the 'Corporate Debtor.'The tribunal noted that the insolvency process could be initiated by a 'Financial Creditor' when a default or debt has occurred. The tribunal found that the appellants had filed the application under Section 7 after the respondent defaulted on the committed returns. The tribunal emphasized that the I & B Code's provisions for insolvency resolution were distinct from the Companies Act's winding-up provisions.The tribunal ruled that the pending winding-up petitions did not preclude the appellants from seeking relief under the I & B Code. The tribunal set aside the adjudicating authority's order, which had dismissed the appellants' application on the grounds of pending winding-up petitions.Conclusion:The tribunal concluded that the appellants qualified as 'Financial Creditors' under the I & B Code and that their application for triggering the insolvency process was maintainable despite the pending winding-up petitions. The tribunal remitted the matter to the adjudicating authority to admit the application and pass appropriate orders, allowing the appellants time to complete the application if necessary. The appeal was allowed without any order as to costs.